The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, July 2, 2010

You be the judge of where the biggest bubbles are. The chart below compares the performance of Australian shares, Australian and Sydney residential real estate, and gold (in Australian dollars) since 2003. And it makes for a fascinating contrast. Even after the circa 50 per cent losses during the GFC, Australian shares have only now converged in line with Australian residential real estate, and still sit above Sydney housing.

To the extent you are interested in this stuff, we appear to have seen the bursting of the mother of all bubbles: the Australian sharemarket, which has declined in value by a much larger margin than even US house prices. But for some reason you rarely read about it. Gold, on the other hand, has yet to endure any real correction, and, as Rory Roberson has observed, looks by far the best candidate for the 'bubble' moniker.

One other stand-out feature of the chart is the very low volatility displayed by residential property if, and only if, you can access an extremely well diversified portfolio of it, which, it should be noted, most of us cannot. This is evident in the exceptionally low variability of the blue and orange lines. By way of contrast, the light blue line zig-zags about all over the shop, which is a vivid illustration of the much higher probability of loss one is subject to when investing in shares. And this analysis assumes you have the benefit of holding every single company in the All Ordinaries Index.

We have long suggested that equities investors might experience a protracted period of very poor performance following the GFC-induced downturn. And our predictions appear to be proving out. Notice how the Australian shares line remains well below its 2007 peak. And remember it is mid 2010. As I have pointed out many times before, this is very similar to what happened after the 1987 crash--it took nearly a decade for the index to consistently breach its previous highs.

Here one sleeper issue for asset-allocation is the ageing of Australia's population. Local pension funds are massively overweight listed equities, with an average allocation of around 60 per cent (higher if you include self-managed super). This is around double the weight the Future Fund has chosen to make to the sector. The result is that members are exposed to unnecessary risks. We have been at the vanguard of arguing that super funds should have far greater allocations to lower-volatility categories, such as fixed income.

One defence tendered by industry "advocates" is the notion that younger members with longer time-horizons should have higher holdings of risky shares (since they can purportedly ride out the volatility). While this may be true, the fact is that the super fund membership base is rapidly ageing. As members age, they become much more risk-averse and therefore desire investment exposures to assets that provide certainty and security. Once again, read fixed income, and patently not equities, or commercial property, for that matter.

I love this column , which echoes my views on the subject (see here ). Excerpt below... IF the value of your total assets fell by 6 per c...

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I first started blogging on ideas relating to economics, finance, investments and housing following an invitation from Business Spectator. Please note that I may have an economic interest in any of the items discussed here. You should also be aware that these are my own personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments. Call 1800 YBR YBR to find a financial planner near you.

About Me

While this is a personal blog, professionally Chris is a director and strategic advisor to a number of funds management and financial services companies. In 2009 The Australian newspaper selected Chris as one of Australia’s top 10 “Emerging Leaders” in its economics category. In 2007 Chris was selected by The Bulletin magazine as one of Australia's "10 Smartest CEOs" and by BRW Magazine as one of "Australia's Top 10 Innovators". He previously worked for Goldman Sachs and the RBA. In 2008-09, the Australian Government invested $20 billion in a radical policy proposal developed by Chris to provide liquidity to Australia’s securitisation market. In February 2009, Chris was invited by the Rockefeller and MacArthur Foundations to present innovative policy solutions at the private Transforming America’s Housing Policy summit for Obama Administration officials. Chris served as a Director of The Menzies Research Centre from 2003-07. He has published widely on matters relating to financial economics, and is a regular TV and media commentator. He is a Research Affiliate with the Centre for Ideas and The Economy at Melbourne Uni.